Intraday Market Thoughts Archives

The dollar and yen were easily the top forex performers on Friday while the euro limped to a second consecutive weekly drop despite better-than-expected GDP numbers. Risk aversion was the dominant theme in the market as European officials struggled to find solutions for Greece.

In European trading, the euro gained nearly 150 pips on strong GDP data but worries about Greece reversed that trade, sending EUR/USD down nearly 250 pips from its highs. Die Welt reported on a rift among European policymakers on how to deal with Greeces debt burden. The European Commission, IMF and Germany are said to back a debt extension with the ECB and France opposed. Meetings are scheduled for the weekend and uncertainty led to position squaring.

Aside from continuing eurozone debt fears, there was no catalyst for the risk off environment. This suggests positioning and seasonality were drivers in the move that sent stocks about 1% lower. Economic data was benign to positive. US CPI was in line with the consensus at 3.1% y/y and core at 1.3%. The U of Michigan sentiment survey rose to 72.4 from 69.8 (exp: 70.0). Inflation expectations fell to 4.4% from 4.6%.

Weekly CFTC data painted a predictable picture with EUR longs cut by one-third to 61.4K and GBP longs cut nearly in half to 18.K. CAD longs were cut to 37.2K from 54.0K but AUD was only trimmed to 60.3K from 73.4K. The biggest gainer was the yen as positioning shifted from -18.8K to +13.05K.

On the week, the top performer was USD, followed closely by JPY. The Swiss franc was the worst performer, followed by EUR. Several pairs closed outside critical weekly support/resistance levels. For more, see: http://bit.ly/jFXzMZ

EURUSD gained a full cent on the back of good GDP numbers but has since slipped back slightly. GBPUSD continues to trade heavy near the lows of the day.

Euro was supported during the London session after both French and German Q1 GDP numbers came out much better than expected at 1.5% and 1.0% respectively. Market expected only a modest growth at 0.9% and 0.6%. Whole Eurozone preliminary GDP q/q also came out better than expected at 0.8% vs. 0.6% expected.

EURUSD gained a full cent and reached a high of 1.4340 but has slipped back sligthly. Cable continues to be the relative strength loser and trades near the lows of the day. Risk on atmosphere underpinned silver (up 2 USD/oz on the day) and gold (up nearly 15 USD/oz).

Trading during the US session is likely to be determined by core CPI released at 8:30 EDT. Market expects an increase to 0.2% m/m from last 0.1%. Higher then expected reading could send the greenback sharply higher as this would support hawkish voices inside of the FED. A sustained rise in the year on year consumer inflation level would make a future increase in Fed Funds Rate or a decision to start shrinking FEDs balance sheet more likely and it would virtually eliminate the posibility of QE3. Obviously, lower then expected core CPI reading will have the opposite effect. Headline CPI reading is expected at 0.4% m/m after last months 0.5%.

More details on QE2 exit strategy can be found in yesterdays IMT.

Second and last data release of the day is University of Michigan Consumer Sentiment Index released at 9:55 EDT. Traders expect an improvement from last reading of 69.8 to 70.0. Unless we see a significant improvement/disappointment, this release is not likely to change a direction that markets will take after the more important core CPI number.

Should EURUSD close above 1.4250s, then we could see a range bound market for the next few trading sessions. If the US inflation data comes higher and EURUSD closes daily as well as weekly candle near the lows, path to 1.40 continues to be open.

PU - AshrafLaidi.com Staff

EURUSD is getting a much needed boost from higher than expected French & German Q! GDPs, which rose well above Q4 & consensus. Sterling remaining under pressure after the NIESR dampened the mood with its latest forecast.

France Q1 GDP rose 1% q/q (vs exp 0.6%), posting the biggest growth since Q2 2006, following 0.3% in Q4. German Q1 GDP rose 1.5% q/q from 0.4% in Q4, exceeding markets expectations of 0.9%

Yesterdays failure of EURUSD to close above the 55 day MA keeps the bias slightly euro negative in the short term, but as was argued in our Premium piece, there is the need for EURUSD to close this week above the 55 dma.

Here is a SAMPLE of CHARTS from yesterdays premium piece arguing the IMPORTANCE of closing above this key tech level http://twitpic.com/4wt9jp

GBPUSD remains under pressure after NIESR said that economic growth had slipped to 0.3% for the three months to April, yet, they they did say they didnt expect a double dip recession & warned, along with the IMF, that growth was likely to remain constrained by the governments austerity measures, and the high debt levels in the UK economy. A fall below trend line support below 1.6235 against the dollar could well see further losses towards 1.6180.

The not so unexpected hike in Chinese bank reserve requirements yesterday saw a sharp sell off in commodities initially before a sharp rebound later in the afternoon with silver rebounding off trend line support at $32.10 from the August lows at $17.70. A surprise hold in rates by the Bank of Korea on the back of recent softer food prices surprised the markets but looks merely to have served to push the decision out until June.

Oil also pulled back from key support around the $95 despite the IEA revising down its oil consumption estimates for 2011 on the back of weaker demand caused by increased prices. Gold also managed to recover after also testing key trend line support at $1,480 from this years lows at $1,308.50. Despite these sharp pullbacks the Reuters CRB has been unable to close back above its 100 day MA at $347, and could well be on course to test back towards its 200 day MA at $320.

More in depth analysis on all these topics can be found in out Premium section - http://www.ashraflaidi.com/products/sub01/

By KM AshrafLaidi.com Staff

Sentiment bounced back on Thursday but the forex market was a mixed bag with GBP lagging, the dollar generally softer, CHF strong and the kiwi dollar as the top performer. We take a look at how the Feds exit from QE2 will affect markets after a weak US bond auction today. The lone event in the Asia-Pacific session is an interest rate decision from South Koreas central bank.

Heading into New York trading the focus was on US retail sales but the report failed to drive a meaningful reaction. Sales grew 0.5% in April compared to the 0.6% but the March figures were revised significantly higher to +0.9% from +0.4%. The spike in gas prices drove a significant part of the gains. Excluding autos and gas, sales rose 0.2% compared to the +0.5% consensus.

For an indepth look at the EURUSD levels and other trading ideas, see todays Premium Piece: http://bit.ly/jFXzMZ

Market moves were relatively small on Thursday but volatility has picked up over the past two weeks. There are a number of reasons for the indecision in markets but a chief one is uncertainty about how markets will respond when the Fed stops buying securities in June. The jitters were evident today in weak a $16 billion, 30-year Treasury bond sale. The market was expecting a yield of 4.35% but the issue sold at 4.38%. A three basis point miss in a bond auction is significant and it caused a spike in US yields that briefly sent USD/JPY 10 pips higher.

Many market participants are positioning for yields to continue rising, including Bond King Bill Gross who is holding a huge short position in US Treasuries. The point of QE2 has been to keep yields artificially low, allowing consumers and corporations to borrow at rates lower than they otherwise would be. Still, the market is divided on how yields will react to the end of the program. Some think that it will cause a spike in risk aversion which will cause stocks and yields to fall.

A large factor will be the FEDs EXIT STRATEGY. At the moment, there is not clarity but the market will press for answers in the coming six weeks. In a speech Thursday, the Feds Plosser (voter, hawk) conceded that nothing has been decided. Some exit strategies would start with raising interest rates; some would begin by shrinking the balance sheet; others would do both, he said. There is also the prospect of PASSIVE EASING, which we discussed in this website, taking the form of continuous reinvesting of principal payments from maturing bonds with the aim of keeping the balance sheet intact WITHOUT actual outright purchases of new bonds.

In the past, it appeared the Fed was waiting for more clarity about the path of growth and inflation before making any decisions. That clarity hasnt emerged and now the Fed has the enormous responsibility of forming policy with internal divisions about inflation and growth threats. For now, the key takeaway is that volatility will remain elevated until the Fed takes some leadership.

The upcoming session features THE BANK OF KOREAS INTERST RATE DECISION at 0100 GMT. The central bank is expected to hike the main rate to 3.25% from 3.00% as it continues alternating months of holds and hikes. The KRW has been softening on speculation that the BOK may soon head to the sidelines but this sentiment may be misplaced. If policymakers are hawkish, it will not only boost KRW, it could also hurt AUD and NZD similarly to the Chinese CPI figures from earlier this week. KRW is the second best performing currency against the USD (after Indonesian Rupiah) so far this year.

By AB AshrafLaidi.co Staff

Volatility is at high extremes. EURUSD rallies 140 pips off its lows, silver jumped 9% in less than 12 hours without any fundamental reasons. There is no fundamental explanation for either move. Short squeeze remains the order of the day. Traders must pay attention to the key levels that matter. We mentioned those levels on a daily basis in our Premium Service and markets continue to respect them through the lack of daily closings. We give you 5 charts in todays Intermarket Insights, zooming in on EURUSD, USD and Silver. Her is direct link to today's piece: http://ashraflaidi.com/products/sub01/access/?a=424

An unusual loss in Aussie jobs and weaker than expected UK industrial production further & USD extended USD rally at the expense of risk currencies and commodities. GBP shifts from having been the big winner yesterday to the great loser. Aussie broke below 1.06.

GBP UK March industrial production rose 0.3% from February (vs exp 0.9%) and up 0.7% y/y (vs exp 1.1%) . Oil and gas extraction dropped 12.4% m/m. Manuf production edged up 0.2% m/m, but on a y/y level, it slowed to 2.7% from 4.9%.

The Australian dollar slumped overnight on the back of tumbling commodity prices with oil and copper both falling on concerns that rising inflation could cause some demand destruction and a reduction in global economic growth. The plunge was exacerbated after Australian employment data showed a decline of 22k surprising analysts who had expected a gain of 17k. This unexpected drop prompted some speculation that a rate hike may be a little further off as the Aussie dollar slipped towards its May lows around 1.0540.

US retail sales, weekly jobless claims and PPI data are due out later this afternoon, and markets will be looking for an improvement after last weeks surprise jump in weekly jobless.

Watch silver carefully as it hit 33.51, falling below key support levels addressed in our Premium Service, where in-depth trading trading ideas are found. service http://www.ashraflaidi.com/products/sub01/

By KM - AshrafLaidi.com Staff

Inflation worries gripped markets on Wednesday, sending growth-sensitive currencies sharply lower. Oil and silver led a rout on commodities while stock markets fell more than 1%. The Australian dollar fell ahead of todays employment report.

Market sentiment was driven by speculation central banks will be forced to hike rates before the economic recovery becomes firmly entrenched a stagflationary scenario. A number of headlines drove the moves: 1) Chinese CPI rose 5.3% y/y in April compared to the 5.2% expected. 2) The Bank of England rose its inflation outlook and cut growth forecasts for the fourth consecutive quarter. 4) German inflation climbed to 2.7% y/y, higher than expected. 5) The Feds Kocherlakota called for a 50 basis point rate hike before year end.

USD was the top performer while AUD lagged. Talk of rate hikes in the UK initially sent sterling surging but risk aversion erased a large portion of the gains. Commodities were a major story as oil fell $5 per barrel to $98.75 following a US storage build. Silver also erased most of its three-day rebound, falling to 8.6% to $35.15. For key levels in silver and for Ashrafs trade that best navigates swings in risk appetote, see todays Premium Piece: http://bit.ly/myXWbC

AUSSIE JOBS PREVIEW

At 0130 GMT Australia will release April employment data. The unemployment rate is expected to remain steady at 4.9% and the economy is forecast to add 17.4K jobs following a 37.8k increase in March. A positive surprise could leave AUD bulls in a tough spot. A fall in the unemployment rate to 4.8% with the participation rate holding at 65.8% would ramp up rate hike expectations and could boost AUD. At the same time, FEARS & HEADLINES ABOUT CHINESE TIGHTENING and the broader risk averse mood would limit gains. Remember that speculators remain in a heavily long AUD position and, given the overall market mood, the bias will be to use AUD strength to lighten up. A negative surprise will be more straightforward AUD will weaken, especially against JPY.

By AB - AshrafLaidi.com Staff

Deepening risk aversion sends EURUSD below its 55 dma for the 1st time since Jan 18, while USDX tests its own 55 dma also for the 1st time since Jan 18. Gold and silver joining risk assets lower, with silver leading the metals downside after failing to close above its 55 dma of 38.86. See our latest Intermarket Insights for our trades on EURUSD, GBPUSD, NZDCAD and SIlver on here: http://www.ashraflaidi.com/products/sub01/

Sterling is the best performer of the day after the bank of Englands quarterly inflation report raised its near term inflation outlook to level higher than projected 3 months ago (see below). The aggressive inflation forecast overshadowed the banks growth downgrade, making GBPJPY, GBPCHF, GBPNZD and GBPUSD the top performing currency pairs out of a group of 38 pairs.

The BoE said inflation would peak at 5% in Q4 2011, higher than the previously projected 4.5%. Inflation would then remain above the 2% target throughout 2012 before falling to 2.4% in Q4, higher than 1.7%. FX markets shrugged the BoE growth downgrade of its 2011 GDP view to 2.7% from the February forecast of 2.9%, with the assumption of no change in interest rates. It also lowered its 2012 GDP growth forecast to about 2.8% from the earlier 3.2%.

GBPUSD hit a high of $1.6517, taking out our $1.6430 stop. Stay tuned for our Premium Piece coming up later today for the latest detail on GBPUSD techs, EURCHF. Euro is the day's worst perfomer. http://www.ashraflaidi.com/products/sub01/

AL

Sterling will be the centre of attention this morning with the publication of the latest Bank of England quarterly inflation report.

GBP's recent rebound has run into selling pressure over the last 24 hours on fears that the Bank of England will revise down its growth forecast for the UK economy, while at the same time revising upwards its inflation forecast for the next two years. The report is due at 9:30 am GMT, 10:30 BST (5:30 EST).

The report shouldnt contain too many surprises given that the CBI earlier this week downgraded its growth assessment of the UK economy for 2011, and the pound shrugged that off, however the major factor will be how dovish the report will be with respect to interest rate expectations.

A significant revision lower in the growth forecast is likely to mean that any anticipation of a move in interest rates, irrespective of inflation expectations, could well get pushed back into Q4 of this year, which in turn could weigh on recent sterling strength.

UK trade balance for March are out earlier, and are expected to climb to -7.5bn.

Yesterdays China trade figures showed that despite recent tightening measures, the economy is continuing to grow at a significant pace. This has been borne out by the publication of the latest CPI figures for April which came in at 5.3%, slightly above expectations, and only slightly down from last months 5.4%, but nevertheless still worryingly high.

Producer prices for April also remained sticky coming in at 6.8% while industrial production and retail sales figures, though slightly below expectations, also remained strong, coming in at 16.8% and 16.5% respectively.

This data, although mostly weaker than last months, still makes the likelihood of further fiscal tightening quite likely in the near term, especially given that new bank borrowing came in above expectations, which suggests that we could also see further hikes in bank reserve requirement ratios, maybe as soon as this week.

Despite last month's ECB hike, todays German CPI figures for April are still expected to remain elevated at 2.6% on an annualised basis, underpinning expectations of further rate hikes by the ECB, irrespective of the fiscal situation in peripheral Europe.

US trade figures for March out later, expected to increase yet again to -$47bn.

For tactical GBPUSD trades ahead of the BoE report, see todays Premium Piece on here: http://bit.ly/ jwHenk

By KM - Ashraf Laidi.com Staff

Those who have not yet subscribed to our Premium Service, here is a sample page from Monday's analysis, with bullish charts ideas on Gold, Silver & cautiousness on GBPUSD http://twitpic.com/4vm0h6

Sign up for your 1-week Trial http://www.ashraflaidi.com/products/sub01/

Reports of a new Greek bailout spurred a straight-forward risk on day with AUD and CAD leading the way while CHF and JPY lagged. A margin hike for oil traders initially hurt crude but it later rebounded as commodities made broad gains. China jumps to centre stage in Asia-Pacific trading with April data on CPI, retail sales and industrial production on the docket.

Dow Jones reported that Greece will get another 60 in bailout funds. The report was denied but the market bought the rumour and it helped to stabilize EUR/USD around 1.4380. The broader effect was to boost risk appetite and the S&P 500 rose 0.8% for the third consecutive gain.

For tactical trades related to risk appetite, gold, silver and GBP/USD, see today's Premium analysis here: http://bit.ly/jwHenk

The CME announced oil margin hikes late Monday but the effect was minimal. If the goal is to knock down oil prices, we dont see margin hikes as effective as they were on silver, which is a far smaller, less liquid market.

It was a light day for economic data in North America. The US import price index climbed 2.2% in April compared to the 1.8% expected and +2.6% prior. Food and energy price hikes drove the increases. The report helped to stoke inflationary fears, boosting gold and silver prices.

On to China's CPI

Chinas April data deluge is on tap at 0200 GMT. CPI is expected to fall to 5.2% y/y from a 32-month high of 5.4% y/y. Retail sales are expected to rise to 18.0% from 17.4%; industrial production to 14.7% vs. 14.8% prior. The key report is CPI and talk centers on a drop in food prices as a reason for a slowdown. Even a fall to 5.1% would promote risk appetite because it would diminish the risk of Chinese tightening.

Yesterdays Chinese trade balance data was cited as a reason for todays broad market optimism but we dont see it. The large surplus was due to an unexpected slowdown in imports while exports were virtually in-line with estimates. Holidays and seasonal adjustments may have had a factor, but on the face of it the report points to a softening of economic activity in 3-6 months, if not sooner. It also points to the risk of an unexpectedly large U.S. trade deficit in Wednesdays report.

By AB - AshrafLaidi.com Staff

Today's Premium Piece argues for the continued assertion of the 2 themes mentioned in Friday's Intermarket Insight. When are news of a bailout good for the euro and when are they not? We learn that Eurozone woes are failing to cause any sort of contagion into G10 equity indices. Looking ahead, we turn to Wednesday's important Bank of England Inflation Report and the suggested strategy for GBPUSD, silver, gold and EURUSD. Click here for direct access to today's piece. http://bit.ly/jwHenk

Euro continues to slide on fresh Greece rumours, sterling boosted byBRC sales, NZD knocked by IMF report & Australia and Chinese trade surpluses rebound. Higher margin requirements in oil.

EUR remains dragged down by uncertainty surrounding Greeces fiscal position after Standard and Poors downgraded its sovereign rating to B with a warning that further reductions could follow as the agency speculated that haircuts of between 50% and 70% would be required to make Greeces situation more stable. It is becoming increasingly accepted that further ECB rate hikes could increase the pressure on increasingly fragile peripheral nations and bring forward the likelihood of Greeces problems spilling over into Ireland and Portugal. This fear could slow down the pace of future rate rises as Europe wrestles with its debt problems.

GBP is boosted by BRC like for like sales for April, which showed a significant improvement, rising 5.2% against expectations of a rise of 2.5% and bouncing back strongly from Marchs 3.5% decline, suggesting that last months Royal Wedding and extended Easter break may well have brought the shoppers back onto the high street.

EURGBP looks set for test of 50% retracement level at 0.8700, of 0.8355/0.9045 up move.

The New Zealand dollar felt the effects of an unfavourable IMF report overnight which stated that the currency was up to 20% overvalued due to its high interest rates. Also, the March cash deficit was reported at NZD 12.41 billion, NZD 102 million more than was expected in December.

Australias trade balance for March showed a marked improvement jumping to a surplus of A$1.74bn from Februarys A$205m deficit, driven by increased exports of iron ore giving the Australian dollar a boost back towards the upper end of its recent range.

Key levels on the AUDUSD remain at the recent highs above 1.1000, with interim resistance at 1.0810.

Chinas trade balance for April also recovered from Marchs poor figure of $0.14bn. and a quarterly deficit, to show a surplus of $11.42bn, three times expectations, with imports falling back to 21.8% and exports coming in at 29.9%. These figures are expected to reinforce US concerns about Chinas policy with respect to its currency as the two countries continue their meeting to discuss ways of dealing with the current imbalances .

Last nights late 25% margin hike on crude oil by the CME could well limit further speculative upside in oil prices and as such weigh on commodity currencies like the AUD and CAD.

By KM - AshrafLaidi.com staff

Fresh headlines about Greeces default risk led a bumpy day of trading for the euro but the overriding theme was once again US dollar weakness. The session lacked a trading focus but mildly positive risk appetite and rising commodity prices were enough to send the dollar to the bottom of the G10 complex. Focus shifts to CHINA & AUSSIE TRADE FIGURES.

Greece dominated news flow: 1) S&P downgraded Greece two notches to BB- and said the outlook remains negative. 2) Moodys said a multi-notch downgrade to Greece is possible. 3) the German press had several stories about Greek debt restructuring 4) Greeces labour minister said it will be difficult to return to the bond market in 2012 5) Greek two-year yields hit 25.5% and credit default swaps hit records. 6) The contagion spread to Ireland and Portugal as well, with two-year yields at records above 12% in both nations.

The news on Greece sent the euro cascading to 1.4254 from 1.4400 at the beginning of US trading. But even downgrades, defaults and disarray couldnt keep the euro down against the USD as it rebounded to 1.4386 by the end of the session. On the day, the euro etched out a small gain while the dollar lagged. The Australian dollar led, followed by the Swiss franc. The unusual occurrence of AUD and CHF at the top of the leaderboard shows the overall themelessness of the day.

Whats worrisome is that the market needs less and less of a reason to sell USD against anything. In spite of last weeks risk aversion and commodity crash, the USD is trading less than 200 pips from cycle lows against CAD, AUD, CHF and NZD. Part of the reason for todays dollar decline was commodities and stocks. Oil and silver gained a healthy 6-7% on the day, gold climbed $21 to $1513 and copper climbed 2%. The S&P 500 added 6 points to 1346.

ONTO AUSTRALIA & CHINA TRADE FIGURES

Australia will release its trade balance for April at 0130 GMT. A surplus of A$530 million is expected but the breakdown of the data will shed light on how severely the earthquake in Japan is affecting global trade. About 20% of Australian exports go to Japan and a disappointing figure may be due to disruptions and plant closures.

China will release April trade balance figures at 0200 GMT. THIS REPORT IS BADLY UNDERAPPRCIATED BY TRADERS. A surplus of $3.2 billion is expected but this is not the data point to focus on. Instead, look to the import/export figures. Imports are expected to rise 28.9% y/y while exports are expected up 29.5%. Focus especially on imports as Chinese importers are at the very forefront of the global supply chain. When the Chinese are increasing imports its because they see strong worldwide demand for finished goods. Last month, strong figures on imports (27.3% vs. 19.5% exp) and exports (35.8% vs. 21% exp) foreshadowed strong CPI and GDP reports.

By AB - AshrafLaidi.com Staff

Euro takes a turn for the worse after S&Ps downgrade, raising questions on the timing of the next rating move by Moodys & Fitch. As warned on Fridays note, gold & silver have further diverged from the falling euro on the rationale of safe-haven flows. Here is todays Premium Piece titled Gold, Silver Diverge from Damaged Euro w/ special focus on GBPUSD: http://bit.ly/mQPIC9

Last week's EUR plunge late into Friday's trade following German rumours of of Greece's euro exit overshadowed the better than expected German industrial output data for March, and the positive April US payrolls numbers, with a sharp rise of 244k against an expectation of 160k.

This newspaper report was prompted by an unscheduled and secret meeting of EU finance officials at the weekend to discuss a number of options with respect to the debt situations. Today we could well see the single currency recover some of that ground with the release of European May Investor confidence index data for May which is expected to rise to 14.3 from 14.2.

And It certainly has shaken the complacency of investors who seem to think that any type of restructuring is unlikely, despite the fact that two year Greek yields tell a different story, trading around 25%.

Some reports at the weekend have suggested that Ireland may have managed to renegotiate a reduction in its loan interest rate, subject to approval of member states. Greece may well also have to provide extra collateral if it wants a renegotiation or restructuring of its bailout

Fridays reports have placed the thorny subject of sovereign debt restructurings back at the top of the political agenda and the economic agenda, irrespective of yield differentials.

In an event a number of technical indicators seem to suggest we could see further declines in the euro in the days and weeks ahead, with a bearish weekly candle reversal on the EURUSD confirmed on Friday.

In the UK inflation is back in the news after Fridays UK producer prices came in much higher than expected, driven up by higher clothing and fuel costs to 16.4% YoY, and pushing the pound higher.

This weeks Bank of England quarterly inflation report data is expected to revise inflation expectations higher and growth forecasts lower and this could weigh on sterling as we head into the week, despite its recent recovery against the euro. Cable resistance is seen at 1.6440/70 neckline resistance level which had acted as support until late last week.

The US dollar also spiked higher on the positive jobs report posting a bullish engulfing week on the US dollar index which adds some weight to the bearish signal on EURUSD seen at the end of last week.

It was not such good news for the dollar against the commodity currencies like the Australian dollar which has rebounded strongly on the back of recovering commodity prices and ahead of some key Chinese inflation and trade data out later this week.

By KM - AshrafLaidi.com Staff

Having laid out a plausible, if somewhat crude, case for a miss ahead of the non-farm payrolls report on Friday, needless to say we were taken aback by a much better than expected +244K result. So much so, we went straight to the source for a closer look at the data - the Bureau of Labor Statistics' http://www.bls.gov/news.release/empsit.nr0.htm. Here, we observe there are two sources the government uses to derive its monthly employment results - Household data (for unemployment) and Establishment data (for net job creation). The former is in our opinion more worthwhile, as it reflects a direct survey of households while the latter mainly incorporates assessment from businesses (more on that below).

Turning to the Households results - http://www.bls.gov/news.release/empsit.a.htm - we note Civilian labor force practically unchanged (153.4K), the number of unemployed up by 200K (13.7K), and unemployment rate therefore up to 9.0% from 8.8%. So far so good. The rub is that participation rate (labor force / civilian population) is UNCHANGED at 64.2% - higher denominator is the only way it would be MATHEMATICALLY possible to have both higher unemployment rate AND job creation of as much as 244K. In fact, according to the Household survey, the number of employed in April actually FELL 190K. This is how unemployment rate rose to 9.0% while civilian labor force remained unchanged. So... where in the world did +244K come from?

Here we turn to the Establishment data. Unbeknownst to the public, these series operate under the assumptions of a statistical adjustment called the "Birth/Death Model" - http://www.bls.gov/web/empsit/cesbd.htm - or monthly estimates of creation/unwinding of all businesses and government agencies. While we are not privy to the statistical tools the government uses in making these monthly adjustments, we do note it implies a hard-coded model to "reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations." We are hardly conspiracy theorists, suffice to say the government's ability over assessment of net business generation should not be taken at face value to be 100% foolproof, particularly when every other economic indicator has argued in favor of a far softer jobs report. As expected, the bottom of the last link shows net creation of 175K (far beyond recent months!) jobs based solely on the statistical adjustment - the bulk of 244K payrolls "creation." This very discrepancy between rising unemployment, unchanged participation rate/labor force, and a very strong print in new jobs helped temper (along with the rumor-mill of Greece leaving EMU) the early risk-on sentiment later in the US session on Friday.

Turning to the early Asia session economic data on Sunday/Monday, Bank of Japan will releases its outdated policy meeting minutes that preceded the most recent meeting. In Australia, ANZ job ads will foreshadow the official monthly labor data on tap for 21:30ET.

By GG - AshrafLaidi.com Staff

These charts could seem like the perfect set up for USD upside. It was about a month ago (week ending Mar 18) that USD net shorts bottomed at a 3 year low. Six weeks later, USDX hit a 3-year low thanks partly to a 500-pip decline in EURUSD. We've already argued the case against any considerable USD rebound on here. http://ashraflaidi.com/t/?hc2354

Fake rebounds in USD (shown in blue squares) have emerged fairly quickly a few weeks after 2-3% recoveries. The extended decline in USD shorts and subsequent increase in net shorts since 2010 reflects the evident comfort with speculators' shorting of the USD and more importantly, the reality that USD net longs become overcrowded fairly quickly. Could this time be different that USD net shorts have emerged from the most in 3 years? The Greece story must be followed closely, but Fed dovishness isn't going anytime soon. Stay tuned in our Daily Premium "Intermarket Insights" for directional calls.